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One of the major myths of the “high school” version of the causes of the Great Depression is that the 1920s was a period of false prosperity, and it was the excessive dependence on consumer credit which ultimately led to “overconsumption” for which we suffered the hangover for during the 1930s. Ironically, this gets the high school version pretty close to the Austrian version – I don’t think they’d relish that comparison.

However the story is baloney. And to know it is baloney, you can examine the history of credit in any good old book on the topic, or talk to people who lived or remember parents and grandparents who lived during this time. What happened during the 1920s was a change in the composition of credit. Throughout human history, people have bought and sold on credit – fractional reserve banking would never have emerged were that not the case. General stores would never have emerged were this not the case. Early commodity monies would not have emerged in Lydia over 2500 years ago were this not the case.

What happened during the 1920s and into the 1930s was that the economy was changing. We used to have general stores where the large agricultural population bought and sold on credit. The proprietors of these stores generally “underwrote” these credit risks, and would rein in credit when he saw farmers’ pending troubles, and extend it when he saw prospects to do it. There would be no agriculture without credit. So, when catalog sales emerged and the modern department stores emerged in the early 20th century (they were treated just as Walmart is today), they began offering impersonal lines of credit for people to use. General stores were beginning their march to irrelevance, yes, but this did not mean that credit was some new and strange and exploitive thing.

Is it possible that there was an overextension of credit during the 1920s? Yes. But this is a very different question than the simple narrative that this consumer credit was a brand new thing. Sure, there were no refrigerators to buy from the old general stores, but there was plenty else.

2 Responses to “The Myth of 1920s Credit”

  1. JoeD says:

    Never have I heard the idea – not in high school nor from any Austrian economist – that this false prosperity was due to a “brand new thing” called credit. I think you are constructing a fine straw man here in your argument, but a straw man only.

    • wintercow20 says:

      The post was a response not only to a direct question, but to an entire session at a conference on the Great Depression. I suppose the volume of readings we were given, with this idea prominent among them, was a big straw man. Due to the proprietary nature of the conference I am not at liberty to discuss the session, but that’s where it came from.

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